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Gold Tumbles Under $1220 Levels

Monday, September 22, 2014

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Gold continued to witness a massive sell off. The yellow metal settled at its lowest price this year, nearing the $1200 per ounce mark and logged its third straight weekly decline. Other precious metals also dropped heavily amid soaring equities and continued strength in the US dollar. Silver tumbled to a four year low, Platinum fell to a fresh 2014 lows while palladium slumped to a three-month low. Gold fell as the US dollar rallied post the Fed decision where it noted that that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.

The FOMC noted that it currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light ofthe cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.However, the Fed reassured that a key interest rate will stay near zero for aconsiderable time after its bond purchases end next month, deferring for now a clear signal on when it will begin to shift away from low-rate policies in place since the 2008 financial crisis. The US dollar broke under 1.2900 mark against the Euro after the Fed statement, testing its highest level against the Euro in 14 months. Dollar also cruised to a six year high against the Japanese Yen and the broad dollar index hit a fresh 15 month high.

The shiny metal extended its losses after being unable to hold near the key $1300 per ounce levels in early September. A renewed wave of buying in the US dollar after the surprise rate cut and QE announcement from the European Central Bank (ECB) kept lid on gold. The European Central Bank cut its benchmark key interest rates by 0.1% percentage points as a weakening economy and falling prices prompted a dovish response from the central bank. The refinancing rate was lowered to 0.05%, the marginal lending rate to 0.3%and the rate on the deposit facility to negative 0.2%.

Demand worries continue to dominate sentiments for gold. China`s gold imports from Hong Kong in July fell by 42% from a month earlier, according to the Hong Kong Census and Statistics Department, media reports quoted. As per the latest Gold Demand Trends report released by World Gold Council, world gold demand for Q2 2014 was 964 tonnes, down 16%year on year from 1,148 tonnes, central bank purchases rose 28 % year on year, to 118 tonnes from 92 tonnes, total bar and coin demand fell by 56% year on year to 275 tonnes from 628 tonnes, ETF outflows were 40 tonnes, a tenth of the outflows seen in the same period last year.

However, local demand could see a sustained pick up in coming months, particularly if the spot prices drop further. The value of gold officially imported into India in August totalled $2.04 billion, which was nearly three times more than the August 2013 figure of$739 million. This looks supportive for MCX Gold futures as the counter nears Rs 26000 per 10 gram levels.